Week in Review

September 16, 2019

Global Roundup

Trump agrees to two-week delay in China tariff hike. President Donald J. Trump says the United States has agreed to a two-week delay in a planned increase in tariffs on some Chinese imports. (Associated Press)

China exempts certain products from tariffs. China announced a range of U.S. goods to be exempted from 25% extra tariffs put in place last year, as the government seeks to ease the impact from the trade war without lifting charges on major agricultural items, such as soybeans and pork. (Business Mirror)

Unprecedented alliances are moving against Netanyahu ahead of the Israeli Election. The do-over campaign for Israel’s do-over election is reaching its end; voters go back to the polls on Sept. 17. (New Yorker)

Trade between Turkey, Arab countries up 250% in 10 years. Trade between Turkey and Arab states has increased 250% over the past decade, but more can be done to improve these numbers, the Turkish-Arab Chambers of Commerce said during a two-day meeting. (Middle East Monitor)

European powers concerned by Netanyahu annexation plans. Five major European nations said they were deeply concerned about Israel’s announcement of its intention to annex areas of the West Bank. (Reuters)

Trade dispute worries U.S. companies in China. As the Trump administration wages an economic battle with China in the form of reciprocating tariffs and other economic measures, it may not be a great time to be an American company operating in China. (Risk Management Monitor)

All signs point toward recession in Germany. The ifo Institute for Economic Research has lowered its forecast for Germany’s economic growth for 2019 and 2020. Instead of the previously predicted 0.6%, the institute now expects a 0.5% growth rate for 2019. A potential hard Brexit and escalation of trade wars with the U.S. were not taken into account. (EurActiv)

China warns India over potential Huawei ban. China has threatened to punish Indian companies operating on the mainland. It will take such action if the Indian Government moves to ban Huawei Technologies from selling 5G telecom equipment. As a result, India’s appetite for a ban will be palpably reduced. (Global Risk Insights)

Trade and the impact on imports and exports in 2020. Significant and sustained increases in the world trade index (measuring the number of times the word uncertainty or its variants are mentioned in Economist Intelligence Unit (EIU) reports at a country level) should be a worry for many as “the increase in trade uncertainty observed in the first quarter could be enough to reduce global growth by up to 0.75 percentage points in 2019” (Global Trade Magazine)

Real U.S. debt levels could be 2,000% of economy. Total potential debt for the U.S. by one all-encompassing measure is running close to 2,000% of GDP, according to an analysis that suggests danger, but also cautions against reading too much into the level. (CNBC)

South Korea initiating WTO complaint over Japan trade curbs. South Korea is initiating a complaint to the World Trade Organization over Japan's tightened export controls on key materials South Korean companies use to make computer chips and displays. (US News & World Report)

Backlash could cost Xi's Belt and Road $800 billion, report says. A new report suggested the backlash to China’s political and trade policies could shave as much as $800 billion off investment in President Xi Jinping’s signature Belt and Road Initiative, amid mounting concerns about the geopolitical price of doing business with Beijing. (Bloomberg)

The new U.S. strategy to remove Maduro in Venezuela. After months of little progress, it seems the United States may be getting closer to removing Venezuelan President Nicolas Maduro from office. (GPF)

Global Slowdown Is Real

Chris Kuehl, Ph.D., NACM Economist

Everybody seems to agree that the global slowdown is real. The data is hard to ignore and is coming from all directions. The International Monetary Fund, OECD, World Bank, EU and even the U.S. Treasury Department and the Congressional Budget Office all agree the pace of global growth has been fading, and more quickly than had been expected.

What there is not so much agreement on is why. The problem is there are many culprits to choose from, and it is not as simple as blaming trade wars and tariff spats—although these have been playing a role as well.

The latest set of assessments has global growth slowing to less than 3% this year and in the 2.5% range next year. There are already some major economies that have slid into recession territory—such as Germany and Japan. China has seen growth fall to less than half what it was just a few years ago, and even the U.S. is starting to see a decline despite the persistence of the consumer sector. These declines do not necessarily signal that a true global recession is imminent, but it is clear some countries are falling into that trap already.

At this point there are competing theories as to why this is taking place now. In truth, these are all factors, but some are more culpable than others and some are more easily dealt with than others.

At the top of the list of immediate motivations is the trade war that has been taking place between the U.S. and nearly everybody. The Trump plan remains murky, but it seems to be based on a desire to alienate and frustrate as many trading partners as possible. The logic behind attacking China with tariffs and other barriers is relatively sound given the way China has comported itself in terms of trade as well as the innate conflict that exists between the U.S. and China. The antagonism shown toward Europe, Canada, Mexico, Japan and dozens of others has been far harder to understand or justify. The U.S. is not as dependent on trade as many other nations, but exports account for about 15% of total GDP. In contrast, the German economy is 55% dependent on exports, and the global slowdown has been devastating to that sector. In time, companies can adjust and develop new supply chains, but that is made far harder by policies that change on a whim.

A second motivation for the global slowdown and one that is perhaps harder to deal with than trade wars is debt. There has been a great deal of attention focused on the burgeoning debt levels that countries have accumulated, although nobody seems interested in actually doing anything about it. Less attention has been focused on the debt that has been accumulated at the corporate and consumer levels. There has never been this much debt in the corporate community. This is due in part to a decade of low interest rates. In some respects, this has been an ideal time for governments and companies to go into debt as everything from bond yields to loans have been at record lows. The problem is that at some point the cost of that debt goes up and so does debt service. Then, there is the small matter of having gone into debt for projects and investments that do not pan out as planned. The consumer debt situation is even more threatening. The debt load is back to dangerous levels. Should there be a major slowdown or recession, the consumer will be in crisis almost immediately and so will all the entities that provided that debt.

A third reason for the global slowdown is a changing consumer. The majority of the developed world population has been aging and is now quite clearly in the final quarter of their consuming lives. This means Boomers are not the drivers of the consumer economy they once were. This not just a U.S. issue, the aging demographic has been affecting the Japanese and Europeans far longer than in the U.S. The next generation after the Boomers is not able to replace them as consumers. The Gen-X cohort is the smallest of the generations and has not been the big spenders the Boomers were. Behind them are the penny-pinching Millennials. Not that they are really all that committed to frugality, they are basically saddled with debt already. Many entered the workforce in a recession and started out at a lower rate of pay. To top it off, they are “experience buyers” as opposed to “thing buyers” and that has slowed everything from factory activity to transportation and distribution, and certainly retail.

Insolvencies in Central and Eastern Europe

The Central and Eastern European (CEE) region has experienced unparalleled growth in the European Union, says trade credit insurer, Coface. However, a slowdown is expected in the coming years.

The CEE region has seen an improvement in economic activity in recent years. In 2017 and 2018, GDP growth in the region rose to 4.6% and 4.3%, respectively, the highest rates since 2008.

This acceleration in the CEE economy was mainly due to the increase in domestic demand, in particular thanks to the significant fall in unemployment that benefited households. At the same time, households also benefited from strong wage growth, which had a direct impact on consumption. Beyond households’ consumption, growth was supported by an increase in public and private investment.

The aforementioned period of favorable macroeconomic environment brought effects on solvency of companies in the CEE region. GDP-weighted-average insolvencies dropped by 4.2% in 2018, contrary to an increase of proceedings recorded a year prior.

Despite these positive developments, CEE companies also experienced difficulties. The low unemployment rate has led to labor shortages, which have become the main obstacle for businesses, both in their daily activities and in their potential expansion.

Supply-side constraints—including labor shortages, high capacity utilization rates, rising input costs and the impact of the external slowdown (direct and indirect)—are of concern to companies operating in the CEE region. Household consumption is expected to remain the main driver of growth, although the limited acceleration of investment in fixed assets and lower exports will dampen GDP growth.

In addition, the slowdown in the eurozone, the escalation of the trade war between the United States and China and the unclear process of the United Kingdom's withdrawal from the European Union are causing exporters concern because of the potential impact on their companies and economies. Indeed, the expected slowdown in growth in the Central and Eastern European region will be mainly due to the direct and indirect effects of a slowdown in external demand. Average growth in the CEE is expected to reach 3.6% in 2019 and 3.2% in 2020.

As CEE economies are mostly highly open to external markets, weaker foreign demand will manifest not only in growth rates, but also gradually via insolvency statistics. In this regard, sectors that are strongly exposed to foreign markets will suffer, such as the automotive industry and the ones supplying it with parts and components, namely chemicals and metals sectors.

Lifting the Veil on Cross-Border B2B Payments

PYMNTS

Faster cross-border commercial payments are within reach thanks to global initiatives from the private and public sectors, and to growing consensus among fintechs and financial service providers that businesses need faster movement of funds, too. Case in point: There are now more than 57 different real-time payment rails operating (or about to operate) across more than 72 countries in the world today, according to the inaugural PYMNTS Simplifying Cross-Border Payments Playbook, a collaboration with SWIFT.

The multitude of faster payment systems at play, however, means money moves differently from jurisdiction to jurisdiction, often adding friction as funds move globally.

Like consumer payments, cross-border business-to-business (B2B) transactions face a multitude of challenges, many of which link back to the legacy inter-banking system that obscures visibility into where funds are at any given point in time—not to mention tacking on extra costs, too. But demands for capabilities like movement of transactional data and compliance across jurisdictions can be significantly more complex for high-value corporate transactions.

“Countries around the globe employ unique cross-border payment standards, and transmitting funds and data in such a fragmented environment requires a great deal of translation, coordination and cost,” the Playbook explains. “Reliance on legacy payment systems can further exacerbate the frictions involved in sending money between cross-border trading partners, making such business-to-business payments slower, more cumbersome, and more expensive for both senders and receivers.”

Limited Visibility

The complexity of managing a patchwork of proprietary payment systems across markets prohibits corporates on both the sending and receiving end from obtaining visibility into where funds are as they move geographically. And in the legacy inter-banking system, a lack of insight into which banks are moving funds can mean surprise fees only realized after a transaction has settled.

But cost isn’t the only consequence of a lack of visibility. Without businesses able to predict when money will land where it should, buyer-supplier relationships can suffer. That’s particularly true, according to BNY Mellon Treasury Services Director Carl Slabicki, when business partners are unable to share transaction data across borders, too.

“If [companies] are contacted by suppliers that never received payments, for example—and without remittance data to track—they are forced to contact their banks only to be referred to yet another bank,” Slabicki told PYMNTS, pointing to the friction linked to the inter-banking system and the need for multiple banks to handle a single transaction.

“It used to take a day or two to track that [payment] down, and then all of a sudden it would come back a couple of days later missing some money from the principal,” he added. “And it’s all because Bank Three found a comma missing in the name.”

Finally, among the largest headaches of this lack of transparency is the risk of noncompliance, especially as regulators ramp up their fraud strategies while developing faster payment capabilities.

The challenge, though, emerges when funds bounce between several financial institutions, thus subject to local regulation at each point in the process.

Real-Time Data

As cross-border transactions accelerate, service providers are exploring how to address these issues linked to a lack of transparency by moving data in real time, too.

When service providers are able to obtain and move transactional data along with a payment—and move data as fast as the money moves—B2B companies can address many of the friction points connected to their cross-border operations, from compliance and cash flow predictability.

“The ability to track-and-trace transactional data in real time is a key feature of any modern payment system,” the Playbook stated. “Not only can easy access to this data reduce the cost, increase the speed and enhance the security of cross-border payments, but the transparency such data provides is, in itself, a value-added feature.”